Investment Options and HSAs: Findings from the EBRI HSA Database, p. 2

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1 August 2015 Vol. 36, No. 8 Investment Options and HSAs: Findings from the EBRI HSA Database, p. 2 A T A G L A N C E Investment Options and HSAs: Findings from the EBRI HSA Database, by Paul Fronstin, Ph.D., Employee Benefit Research Institute In 2014, 6.4 percent of health savings account (HSA) owners in the EBRI HSA Database had used the investment option portion of the account. Forty-seven percent of the HSAs with investments were opened between 2005 and 2008, compared with 8 percent among HSAs without investments. Among HSA owners with investments, the average age was 48.5 in 2014, compared with 43 among HSA owners without investments. Individuals contributed $2,636 annually on average when they had investments and $1,224 when they did not have investments. Annual distributions for health care claims averaged $1,777 from HSAs with investments, and $1,293 from HSAs without investments. End-of-year account balances averaged $10,261 among HSAs with investments, and $1,709 in HSAs without them. A monthly new sletter from the EBRI Education and Research Fund 2015 Employee Benefit Research Institute

2 Investment Options and HSAs: Findings from the EBRI HSA Database By Paul Fronstin, Ph.D., Employee Benefit Research Institute Introduction The Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (MMA) includes a provision that allows individuals enrolled in certain high-deductible health plans to open and fund a health savings account (HSA), effective Jan. 1, The ability of individuals to use HSAs as a savings vehicle for health care expenses in retirement has been a key selling point. HSAs provide account owners a triple tax-advantage: Contributions to an HSA reduce taxable income; earnings on the assets in the HSA build up tax free; and distributions from the HSA for qualified expenses are not subject to taxation. Because of the triple tax-preference, some individuals might find using an HSA as a savings vehicle for health care expenses in retirement more advantageous from a tax perspective than saving in a 401(k) plan or other retirement savings plan. HSAs often have an investment-account option that allows account owners to invest in not just a money market account, but in mutual funds and other investment vehicles much like they would in a 401(k) plan. Some HSA owners may use the investment-account option as a means to increase savings for retirement, while others may be using it for shorter-term investing. It has been estimated that about 3 percent of HSA owners invest, and that HSA investments are likely to increase from an estimated $3 billion in 2015 to $40 billion in Whether investing for retirement or the short term, there are trade-offs to consider. Individuals must consider whether shifting contributions from a 401(k) plan to an HSA means leaving employer-matching dollars on the table. In addition, in order to maximize the savings in an HSA to cover health care expenses in retirement, HSA owners need to pay the medical expenses they incur prior to retirement on an after-tax basis using money not contributed to their HSA. Many individuals may not have the means to both save in an HSA and pay their out-of-pocket health care expenses. Finally, the investment options in the HSA may not be the same as the investment options in a 401(k) plan. Note that HSA owners with investments always have the option of liquidating them in order to take a distribution for a health care claim. They can also take a lump-sum distribution at any time once investments have provided an acceptable return. This paper examines data from the EBRI HSA Database to get a better understanding of who is using the investmentaccount option, and how account balances and contributions differ with respect to whether there is an open investment option in an HSA. About the EBRI HSA Database The EBRI HSA Database Project is a large representative repository of information about individual HSAs. As of Dec. 31, 2014, the EBRI database includes statistical information for: 2.9 million health savings accounts. $5.0 billion in assets. The 2014 EBRI HSA database covers 21 percent of the universe of HSAs and 21 percent of HSA assets. 2 The project is unique because it includes data provided by a wide variety of account record-keepers and, therefore, represents the characteristics and activity of a broad range of HSA owners. ebri.org Notes August 2015 Vol. 36, No. 8 2

3 When it comes to the availability of an investment-account option, the EBRI database contained about 1.2 million HSAs with $2.7 billion in assets that had information as to whether an investment-account option was available in Nearly 78,000 of these HSAs (or 6.4 percent) had investments in their account. In 2014, the nearly 78,000 HSAs with investments held $795 million in assets, of which $573 million (or 72 percent) were held in an investment option. Overall, the $573 million in investment options represented 21 percent of the $2.7 billion in assets in accounts where participation in an investment option could be tracked. More information about HSAs and the EBRI HSA Database can be found in Fronstin (2015). Year HSA was Opened HSAs with investments are generally older than accounts that do not have investments. In other words, owners of older HSAs have a higher propensity to invest. The 2014 analysis showed that nearly one-half (47 percent) of the HSAs with investments were opened between 2005 and 2008, whereas 8 percent of HSAs without investments were opened between 2005 and 2008 (Figure 1). In contrast, 5 percent of HSAs with investments, and 28 percent of HSAs without investments were opened in Age of HSA Owner There are age differences between HSA owners with investments and those without. Among HSA owners with investments, the average age was 48.5 in 2014, compared with 43 among HSA owners without. The difference in the average age can be explained better by examining the age distribution of each group. HSA owners with investments are much less likely to be in the under-age-25 group and are much less likely to be in the age group. In 2014, only 1 percent were under age 25, compared with 4 percent among HSA owners without investments, and 13 percent were ages 25 34, compared with 26 percent of individuals without investments (Figure 2). Both groups were about equally likely to be ages and Individuals with investments were more likely to be ages and 65 or older than those without them. These findings suggest that younger HSA owners are not seeing the long-term potential of the account, despite their longer time horizon for realizing a return. Contributions Individuals with investments in their HSA make larger annual contributions than individuals without them. Similarly, HSAs with investments also have received higher annual employer contributions. In 2014, individuals contributed $2,636 annually on average when they had investments, and $1,224 when they did not (Figure 3). Employers contributed $586 annually on average when the HSA had investments, and $519 when there were no investments. Individuals were slightly more likely to make a contribution (66 percent vs. 59 percent) when they had investments. Employers, however, were much less likely to make a contribution (39 percent vs. 52 percent) when there were investments. When examining the distribution of individual contributions, it is apparent that the average contribution is higher among individuals with investments. This may be because they are more likely than those without investments to contribute the statutory maximum, or because those who contribute the maximum are more likely to invest. Eleven percent of HSA owners with investments contributed $6,550 or more in 2014, compared with 3 percent among HSA owners without investments (Figure 4). HSA owners with investments were also much more likely to contribute between $2,000 and $4,999 than those without investments. ebri.org Notes August 2015 Vol. 36, No. 8 3

4 4 Figure 1 HSAs, 1 by Year Account Was Opened and Presence of Investments, % % 2004 or Earlier (Includes MSA 2 Rollovers) 16% 16% 1 13% 1 12% 11% 9% 9% 7% 6% 1% 1% 2% Health savings accounts. 2 Archer Medical Savings Account. 4 Figure 2 HSA* Owners, by Age and Presence of Investments, % % 27% % 1 13% 1 8% 3% 1% Under or Older *Health savings account. ebri.org Notes August 2015 Vol. 36, No. 8 4

5 Figure 3 Summary of Average Account Activity, by Presence of Investments, 2014 With Investments Without Investments Accounts With Contributions or Distributions Individual contributions $2,636 $1,224 Employer contributions Distributions for claims 1,777 1,293 End-of-year account balance 10,261 1,709 Percent of Accounts With Contributions or Distributions Individual contributions 66% 59% Employer contributions Distributions for claims The difference in average employer contributions can be explained by the fact that individuals with investments are more likely than those without them to not receive any employer contribution. Just over 60 percent of HSA owners with investments did not receive an employer contribution in 2014, compared with 48 percent among HSA owners without investments (Figure 5). The distribution of combined individual and employer contributions can be seen in Figure 6 and is driven by the finding that HSA owners with investments are more likely to contribute the statutory maximum than individuals without them. Distributions While contributions are higher in HSAs with investments, suggesting that account owners are using their HSA either as a retirement savings vehicle or a long-term savings strategy, distributions for health care claims are also higher in HSAs with investments. In 2014, annual distributions averaged $1,777 from HSAs with investments, and $1,293 from HSAs without investments (Figure 3). However, HSA owners with investments were no more or less likely than those without them to take a distribution for a health care claim. Among individuals taking a distribution for a health care claim, distributions averaged $2,735 from HSAs with investments, and $1,981 from HSAs without them in 2014 (Figure 7). End-of Year Account Balances Average end-of-year account balances are much higher in HSAs with investments than in HSAs that do not have investments. In 2014, end-of-year account balances averaged $10,261 among HSAs with investments, and $1,709 in HSAs without them (Figure 3). Differences in the year in which the account was opened explained some of the difference in account balances. As shown in Figure 8, HSAs with investments were much older than accounts that did not have investments, so their owners had more years to make contributions. However, even when controlling for the year that the HSA was opened, average end-of-year balances in HSAs with investments outpaced those without investments (Figure 8). The distribution of average end-of-year account balances showed that while 37 percent of HSAs with investments had a balance of $10,000 or more at the end of 2014, only 4 percent of HSAs without investments had such a balance (Figure 9). ebri.org Notes August 2015 Vol. 36, No. 8 5

6 7 Figure 4 HSAs,* by Level of Individual Contributions and Presence of Investments, % 31% % 1 12% 11% 11% 8% 3% 3% 0 Less than $100 $100 $999 $1,000 $1,999 $2,000 $4,999 $5,000 $6,549 $6,550 or More *Health saving accounts. Contribution Level 7 Figure 5 HSAs,* by Level of Employer Contributions and Presence of Investments, % 5 48% % 13% 1 7% 2% 1% 1% 0 Less than $100 $100 $999 $1,000 $1,999 $2,000 $4,999 $5,000 $6,549 $6,550 or More *Health savings accounts. Contribution Level ebri.org Notes August 2015 Vol. 36, No. 8 6

7 Conclusion This study examines data from the EBRI HSA Database. It focuses on the 1.2 million accounts in the EBRI database that have information on the presence of an investment option. Overall, 6.4 percent of HSAs have investments. HSAs with investments are older; the owners of such accounts are older; balances are higher; and individual contributions are higher. Distributions for health care claims are higher in HSAs with investments. These findings may indicate that HSA owners with investments are maximizing its use for saving, spending, and investing. However, they may not truly be using it as a retirement savings vehicle, as the propensity to take a distribution for a health care claim is the same whether or not an investment option is being used. Given the availability of investment options and the triple tax-advantage of HSAs, future research will examine whether HSA owners are moving contributions from 401(k) plans into HSAs. References Berkley, Todd. The Coming HSA Investment Wave. White Paper, Minnetonka, MN: HSA Consulting Services, LLC, Fronstin, Paul. "Health Savings Account Balances, Contributions, Distributions, and Other Vital Statistics, 2014: Estimates from the EBRI HSA Database." EBRI Issue Brief no. 416 (Employee Benefit Research Institute, July 2015). Endnotes 1 See and Berkley (2015). 2 According to Devenir, there were 13.8 million accounts holding $24.2 billion in assets as of Dec. 31, See ebri.org Notes August 2015 Vol. 36, No. 8 7

8 7 Figure 6 HSAs,* by Level of Total Contributions and Presence of Investments, % 26% 22% 17% 29% 23% 19% 12% 1 7% 6% 2% 0 Less than $100 $100 $999 $1,000 $1,999 $2,000 $4,999 $5,000 $6,549 $6,550 or More *Health savings accounts. Contribution Level Figure 7 Average Annual Distributions Among Accounts With Claims and the Likelihood of Having a Distribution for a Health Care Claim, by Presence of Investments, 2014 $4, $3, Average Annual Distributions $3,000 $2,500 $2,000 $1,500 $2, $1, Percent with a Distribution for a Health Care Claim 3 $1,000 2 $500 1 $- ebri.org Notes August 2015 Vol. 36, No. 8 9

9 Figure 8 Average End-of-Year Account Balance Among Accounts With Contributions and Presence of Investments, by Year HSA 1 Was Opened, $895 $1,176 $2,228 $6,544 $7,421 $7, $3,085 $10, $3,501 $3,974 $4,057 $14,272 $13,854 $15, $4,755 $11, $6,004 $15, $6,063 $19, or Earlier (Includes 2 MSA Rollovers) $9,927 $25,552 $- $5,000 $10,000 $15,000 $20,000 $25,000 $30,000 1 Health savings account. 2 Archer Medical Savings Account. 7 Figure 9 Average End-of-Year Account Balance, by Presence of Investments, % 37% % 7% 8% 8% 8% $0 $1 $499 $500 $999 $1,000 $1,999 $2,000 $2,999 $3,000 $3,999 $4,000 $4,999 $5,000 $7,499 $7,500 $9,999 $10,000 or More 7% 3% 1 2% ebri.org Notes August 2015 Vol. 36, No. 8 9

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11 EBRI Employee Benefit Research Institute Notes (ISSN ) is published monthly by the Employee Benefit Research Institute, th St. NW, Suite 878, Washington, DC , at $300 per year or is included as part of a membership subscription. Periodicals postage rate paid in Washington, DC, and additional mailing offices. POSTMASTER: Send address changes to: EBRI Notes, th St. NW, Suite 878, Washington, DC Copyright 2015 by Employee Benefit Research Institute. All rights reserved, Vol. 36, no. 8. Who we are What we do Our publications Orders/ Subscriptions The Employee Benefit Research Institute (EBRI) was founded in Its mission is to contribute to, to encourage, and to enhance the development of sound employee benefit programs and sound public policy through objective research and education. EBRI is the only private, nonprofit, nonpartisan, Washington, DC-based organization committed exclusively to public policy research and education on economic security and employee benefit issues. EBRI s membership includes a cross-section of pension funds; businesses; trade associations; labor unions; health care providers and insurers; government organizations; and service firms. EBRI s work advances knowledge and understanding of employee benefits and their importance to the nation s economy among policymakers, the news media, and the public. It does this by conducting and publishing policy research, analysis, and special reports on employee benefits issues; holding educational briefings for EBRI members, congressional and federal agency staff, and the news media; and sponsoring public opinion surveys on employee benefit issues. EBRI s Education and Research Fund (EBRI-ERF) performs the charitable, educational, and scientific functions of the Institute. EBRI-ERF is a tax-exempt organization supported by contributions and grants. EBRI Issue Briefs are periodicals providing expert evaluations of employee benefit issues and trends, as well as critical analyses of employee benefit policies and proposals. EBRI Notes is a monthly periodical providing current information on a variety of employee benefit topics. EBRIef is a weekly roundup of EBRI research and insights, as well as updates on surveys, studies, litigation, legislation and regulation affecting employee benefit plans, while EBRI s Blog supplements our regular publications, offering commentary on questions received from news reporters, policymakers, and others. The EBRI Databook on Employee Benefits is a statistical reference work on employee benefit programs and work force-related issues. Contact EBRI Publications, (202) ; fax publication orders to (202) Subscriptions to EBRI Issue Briefs are included as part of EBRI membership, or as part of a $199 annual subscription to EBRI Notes and EBRI Issue Briefs. Change of Address: EBRI, th St. NW, Suite 878, Washington, DC, , (202) ; fax number, (202) ; subscriptions@ebri.org Membership Information: Inquiries regarding EBRI membership and/or contributions to EBRI-ERF should be directed to EBRI President Dallas Salisbury at the above address, (202) ; salisbury@ebri.org Editorial Board: Dallas L. Salisbury, publisher; Stephen Blakely, editor. Any views expressed in this publication and those of the authors should not be ascribed to the officers, trustees, members, or other sponsors of the Employee Benefit Research Institute, the EBRI Education and Research Fund, or their staffs. Nothing herein is to be construed as an attempt to aid or hinder the adoption of any pending legislation, regulation, or interpretative rule, or as legal, accounting, actuarial, or other such professional advice. EBRI Notes is registered in the U.S. Patent and Trademark Office. ISSN: /90 $ , Employee Benefit Research Institute Education and Research Fund. All rights reserved.